(b) The impact of tax provisions on coal and nuclear power economics (c) The financial incentive for premature construction (d) The Three Mile Island accident and tax accounting In this analysis, I am presenting new data on costs as affected by the 1981 Tax Act, summarizing previous research described in various publications, and making use of work by Kathleen Cole Cole2/. The appropriate context for understanding the impact of tax provisions on specific coal and nuclear plants can be seen by general statistics summarizing the tax status of utilities with major construction programs. This information is reported in the detailed income tax accounts and notes of utility corporations, and summarized in the U.S. Department of Energy statistical reports. In New York, the three upstate utility corporations have had major construction programs in the 1970's. In the last seven years, the total reported current Federal income tax payment is negative. In this period, the utilities regularly reported positive net income and made dividend payments to shareholders. It is evident from the tax reconciliation accounts that the disappearance of current tax liability is caused in large part by the credits, deductions, and exclusions gained through the investment incentive provisions of the corporate income tax. In California, for the years 1974-1979, the three major private utilities reported positive current tax payments seven times and negative or no payments eight times. It should be emphasized that tax benefits accruing to utilities and tax incentives received by customers can differ significantly, particularly in the construction period and first years of operation of new facilities. In 1978, the six major Pennsylvania utilities had in aggregate a negative tax payment of -$19.1 million in Federal income taxes. However, one critical review estimates that these six Pennsylvania utilities charged their customers $252.8 million in operating tax expense during 1978. The difference is defined as "phantom taxes": $271.9 million. This is $66 per customer in 19783/. This point is necessary to provide proper context for the preceding discussion of after-tax cost to utility. Tax subsidies are not necessarily equivalent to lower customer charges; a tax subsidy flows primarily to the utility. The degree and timing of distribution of tax benefits varies significantly from state to state. In addition, it must be noted that tax subsidies accruing to utilities cause a heavier tax burden to be placed upon other business and personal income tax payers. A nuclear plant with a tax subsidy of 74/kWh will attain an annual subsidy of approximately $365 million for its owner. This requires greater tax contributions from other tax sources. Primary interest here is given to the question of tax subsidies and their effect upon relative coal and nuclear power cost. However, active solar heating receives tax subsidies comparable to those accruing to nuclear power. A home heating system using active solar heating and electric heat from nuclear power appears to receive tax subsidies greater than any other heating system. 2. NUCLEAR POWER COST AND TAXATION Table 1 summarizes the economic benefits of nuclear power which have led utility managements in the past to prefer nuclear power. Note that, in early 1981, nuclear fuel delivered to a reactor costs only an estimated 56¢ per million Btu. Coal is more than twice as expensive, and natural gas and oil even more so. Some utility managements continue to expect nuclear power's fuel cost advantage to continue to provide a competitive edge for nuclear power. In A. Table 1. Comparative Fuel Cost and Total Generating Cost Comparative Cost of Utility Fuel, early 1981, actual or estimated current B. Projected Future Generating Cost, Commonwealth Edison, /kWh Sources: Current fuel cost for conventional fuel is from U.S. DoE, "Cost Part "B" in Table 1, a Commonwealth Edison projection indicates their belief in continued economic preferability of nuclear power. However, the tax provisions under consideration here provide a considerable impetus to nuclear power development. Let us hypothesize a nuclear plant ordered in 1980, and examine the tax implications before and after the 1981 Tax Act. The model utilized represents a nuclear plant with a planning horizon of 47 years. This time period consists of a 10-year construction period, a 30-year operating period, and a 7-year decommissioning period. The model utilizes 165 variables, 100 of which change over time. It is described in detail elsewhere. The This hypothetical nuclear plant is to be built in Pennsylvania. specific economic assumptions for both nuclear and coal plants are in the Appendix. Profit It is assumed The ESOP 1.5% Figure 1 shows the time path of profit and current tax liability. means before tax net income, less actual current tax expense. that the tax provisions are as they will be fully effective. investment tax credit is eliminated, making 10% the maximum investment tax credit. The tax life for the 30-year nuclear plant is now 10 years. Accelerated depreciation at 200% is used for one year, followed by sum-of-the-years-digits depreciation for the remaining 9 years of tax depreciation. Interest payments continue to be deductible. In addition, all tax benefits arising from the tax life, the accelerated rate, and the investment tax credit must now be normalized. This means, as suggested above, that regulatory commissions must set rates to allow utility companies to collect revenue now as if these provisions did not exist. The regulatory commission and the utility may then choose to amortize these benefits to customers over the life of the facility by essentially deducting the balance |